The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Karen Kwok

NEW YORK, May 14 (Reuters Breakingviews) - SoftBank 9984.T founder Masayoshi Son's instinct to pay lavishly for prized assets met a market even more euphoric than he is. The Japanese investor attempted to acquire upstart Cerebras Systems ahead of its initial public offering, Bloomberg reported. Judging by the novel chip designer’s explosive stock debut, boss Andrew Feldman was right to rebuff the offer. After pricing at an implied valuation of $56 billion, shares opened up 89% on Thursday afternoon. Artificial intelligence-fueled mania is outpacing the industry’s circular deal logic.

Son’s interest would fit with efforts to build a semiconductor empire around majority-controlled British chip designer Arm. After listing the now-$237 billion company in 2023, SoftBank bolted on Graphcore, agreed to acquire Ampere Computing for $6.5 billion, and examined $162 billion Marvell Technology, too, according to Bloomberg.

Cerebras would have been a logical next step. Arm wants to sell AI chips. Cerebras claims that its silicon can produce chatbot output up to 15 times faster than Nvidia’s gold-standard processors.

A deal would also reflect another classic Son tactic: doubling down on an existing bet. Both sides are already connected through OpenAI, in which SoftBank holds a 13% stake. After an abortive listing attempt last year, Cerebras received a boost from a massive agreement with the Sam Altman-led ChatGPT developer, which underpins most of its anticipated future revenue. In return, Cerebras handed over warrants, leaving OpenAI with about 3% of the company after its offering, potentially rising to 11% over time.

So Son owns a stake in OpenAI, and OpenAI owns a chunk of Cerebras, which in turn has seen its value skyrocket thanks to its sales to Altman. This resembles other circular industry arrangements, like Nvidia NVDA.O, which has invested in OpenAI and AI cloud provider CoreWeave CRWV.O, which are buyers of Nvidia chips.

Owning all of Cerebras would close the loop and accrue this self-generated value back to Son. Frothy markets simply make it too expensive.

About 43% of Cerebras’ $25 billion revenue backlog will be recognized between 2028 and 2029. Compress it into a one-year period, and that’s a bit under $11 billion. If other customers, such as Abu Dhabi's G42, continue accounting for 24% of sales, the total rises to $14 billion. Assume a 22% operating margin, in line with rival AMD AMD.O, and Cerebras would generate about $3.1 billion of operating profit. Apply the standard U.S. corporate tax rate, and it implies a measly 5% return on an acquisition based on Cerebras's $185-a-share IPO price. Even adding $100 million of synergies, a bit under a third of operating expenses, barely helps.

Son should be happy to let this one go. For once, public markets may have made a deal too rich for even him.

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CONTEXT NEWS

Arm Holdings and its majority owner SoftBank Group made an approach to acquire Cerebras Systems, weeks before its expected initial public offering, Bloomberg reported on May 13 citing people familiar with the matter.

UK-based Arm and its parent expressed preliminary interest in acquiring Cerebras, an approach that was rebuffed, Bloomberg says.

Cerebras priced its IPO at $185 per share on May 13, Reuters reported, above an earlier indicated range of $150 to $160. The company's shares opened at $350 in their U.S. market debut on May 14, jumping 89% above the initial public offering price, giving the chip designer a valuation of $106.8 billion on a fully diluted basis. The Sunnyvale, California-based chipmaker, which is ​a competitor to Nvidia, raised $5.55 billion in its upsized offering.